As Investors Look for a Safe Haven, Either the Dollar or Gold Could Surge

By Daily Bell Staff - June 27, 2016

Gold faces own headwinds after Brexit shock … Analysts question whether bullion can rise further after solid gains already this year … As the UK voted to leave the EU, the only people celebrating more than Brexit politicians were a clutch of small brokerages that benefit when the world gets a little more volatile: bullion dealers that offer gold coins and bars to retail investors. –Financial Times

FT has reported on the increased interest in gold following Brexit but there are differing opinions regarding how it will do for the rest of 2016.

The paper quotes Helima Croft, head of commodity strategy at RBC Capital Markets, as follows:

“We believe that there remains limited price upside for gold from current levels after today’s safe-haven driven jump higher … Gold will have to contend with a strong dollar and will probably refocus on global monetary policy (namely the Fed) for the remainder of 2016.”

Interestingly, Goldman analyst Jeff Currie told the FT that purchases of gold might better be denominated in pounds or euros than dollars given that most of the Brexit impact will be felt more severely in Europe.

The idea here is that more money will eventually flow into the dollar rather than precious metals. This thinking is historical in nature, based on what happened in 2008 when Lehman Brothers collapsed.

After Lehman, gold fell some 30 percent or more as the dollar rallied.

Blooomberg reports that one of the most famous metals investors, Jim Rogers, is betting on the dollar rather than gold. In a phone interview he told Bloomberg that the prices of bullion were due for a drop.

He even reportedly predicted that gold would end the year lower than at current levels.

Rogers [added] that he would buy the metal again once it declines enough. That view is at odds with the median of 12 forecasts in a Bloomberg survey that predicts a gain of more than 7 percent for gold from where it’s trading now.

… Rather than selling his gold, Rogers said he would take some some short positions as a hedge against his holdings. “I own plenty of gold, I assure you.”

Rogers has been a consistent supporter of both gold and silver so it is probably not surprising he will continue to hold his gold.

In any event, the dollar-gold question is not a difficult one to answer.

One holds physical gold as an investment and also paper gold – ETFs and junior miners – especially if the business cycle looks promising.

And surely the business cycle continues to favor gold. Here, from FT:

From London’s Harrods department store in Knightsbridge, to online precious metals dealers, many reported record volumes and demand on Friday. Sharps Pixley, which has a store in Mayfair, said online sales had drained its stocks of larger bullion bars, leading it to call on emergency reserves in Germany.

After 2008, we estimated that central banks would end up printing some $200 trillion in order to keep the world economy afloat.

Now, again, central banks face the prospect of impossibly massive liquidity injections. Post Brexit, European countries are going to start lining up front door of the European Central Bank to demand debt relief.

Debt generally is at levels that even central banking officials don’t see as feasible. Sovereign debt, bank debt and consumer debt are simply not going to be honored.

The situation is so bad that earlier this year William White, a top former official at the Bank for International Settlements told the UK Telegraph that the only way to fix the financial system was to declare a “debt jubilee” followed by a reset.

Looking at a post-Brexit business and financial environment, it is difficult to see how any currency can provide a long-term “safe harbor.” The dollar too is under attack and gradually losing its exclusivity as the world’s dominant reserve currency.

As always, we look back to the 1970s for insights about what we can expect going forward. We recall that precious metals did extraordinarily well during that decade, and junior miners too.

Conclusion: In a world about to flooded with yet more trillions of fiat currency, gold and silver could retrace what occurred during the 1970s. Then both the yellow and white metals achieved valuations against the dollar that still have not been equaled, adjusting for price inflation.

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